Non-residents’ CGT on residences could mean the end of PPR elections

Non-residents’ CGT on residences could mean the end of PPR elections

Fri 04 Apr 2014

The Government’s consultation about taxing non-residents on their gains derived from UK-residential property goes further than simply extending UK CGT to make non-residents taxable on disposals of UK residential property in the same way as UK residents.  The new rules will only apply to gains arising after April 2015.

What will be chargeable?

The extended CGT charge will be focused on property used or suitable for use as a dwelling. 

All UK residential property other than certain communal residential properties such as student and school accommodation, residential care accommodation required due to illness, age or disability, and other communal uses such as military barracks, prisons and other places which provide the sole or main residence of 90% of their residents.

“Residential property” will not be restricted to property that is actually occupied but will also include any property suitable for residential use or being built or converted for residential use.  Where residential property is developed in the course of a trade, it will first be necessary to assess whether the gains should be taxed as income or profit rather than CGT, as noted below.

When will the charges apply?

The changes, though half-expected, were only announced in the Budget and will be complex to introduce, so a starting date in April 2015 is necessary to accommodate the consultation process.

Who will be chargeable?

The charge is proposed to extend to:

  • individuals (including LLP and other partnership members on a look-through basis);
  • trustees;
  • companies on properties valued below £500k. 

For companies the ATED related CGT charge will always take precedence where the property is subject to ATED and the non-ATED companies will be subject to a ‘tailored charge’. 

Non-resident individuals will have an annual exemption like UK residents.

Who won’t?

Generally the following will be excluded from the charge:

  • disposals of shares or units in a fund such as a collective investment scheme (CIS) or Property Authorised Investment Fund (PAIF) provided they have genuinely diverse ownership– so closely held funds will be within scope.
  • pension funds
  • non-residents investing through UK REITs.

The new charge will not extend to persons already subject to tax on gains as:

  • trading profits:
  • chargeable gains on assets used in UK trading activity;
  • ATED-related CGT gains.

Property letting businesses

At present non-residents are only chargeable to CGT on assets that they use for the purposes of a UK trade. The proposed changes will bring non-resident landlords within scope. This is an indirect consequence of the proposal but the extension is understandable on the basis of making the tax system more consistent. The proposals will therefore catch  property rental businesses that are outside the scope of ATED and the ATED related CGT charge.

Property letting businesses subject to the newly extended CGT charge, rather than the ATED related CGT, will be allowed to claim relief for losses on UK residential property.

Possible abolition of PPR elections

The Government is considering abolishing PPR elections for all residences, not only those owned by non-residents.   Currently an individual who occupies more than one residence can elect which property is to be their PPR, irrespective of whether it is the one they use the most.  Bringing non-residents into CGT without changing this would invariably result in all non-residents making a PPR election on their UK residence.

This might result in every PPR receiving relief on the basis of actual occupation as the main residence, in the same way as is currently required where an individual occupies more than one residence and makes no election. An alternative raised for consultation is a fixed rule  that identifies a main residence as that in which the person has been present the most for any given tax year.  . Existing extensions of PPR relief to periods of absence and letting are not under current threat.

New withholding tax and returns

It looks likely that the primary means of collection of CGT from non-residents will be by withholding tax (WHT), to be operated by agents acting for vendors.   Property owners will be offered the option of voluntary self assessment. Tax will be due for payment under self assessment or WHT within 30 days of receipt of the sale proceeds. The condoc quotes the system for collecting SDLT but there are also obvious similarities to the Non-resident Landlords Scheme. Non-residents’ CGT returns would be separate, free-standing returns in the same way as ATED-related CGT returns.  However, no WHT should be due if a declaration was made that there is a loss.

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